Regulators seize Suburban Federal

Andrea K. Walker and Nicole FullerThe Baltimore Sun

Federal regulators seized Suburban Federal Savings Bank in Crofton late yesterday - marking the first Maryland bank failure since 1992 - after executives were unable to find a buyer to help them offset millions of dollars in bad loans.

The FDIC arranged the sale of all of Suburban's deposits and its seven branches to the Bank of Essex in Tappahannock, Va. That means Suburban's business will go on as normal today, though under a different name.

The Virginia bank also bought most of Suburban's assets at a discounted price and many of its loans, according to the Federal Deposit Insurance Corp. Suburban, which was founded in 1955, had assets of $360 million and deposits of $302 million as of Sept. 30.

The deal is expected to cost the FDIC $126 million, or 35 percent of Suburban's assets, an amount some banking experts described as costly.

Suburban Federal is the latest financial institution to fail after getting caught up in the mortgage crisis. It was among three banks that the FDIC seized yesterday, bringing the total failed banks to six this year.

About 50 FDIC employees descended on the bank's headquarters shortly after it closed at 6 p.m. yesterday carrying in computers and other items. Two officers stood guard at the door. A short time later, a man wheeled in cookies, sandwiches and water for employees who were expected to work well into the night. Employees could be seen gathered in the lobby.

Suburban Federal depositors will automatically become customers of the Bank of Essex and will be able to write checks or use ATM or debit cards to access their money throughout the weekend, the FDIC said. Loan customers also should continue to make payments.

"No customers, no depositors are going to lose any money as a result of this action," said FDIC spokesman David Barr, who was at Suburban Federal's stately headquarters building last night. "They should look at this as a simple merger of two banks."

An executive from Community Bankers Trust Corp., a financial holding company based in Richmond, Va., and the parent of the Bank of Essex, said he doesn't expect to cut any of Suburban's staff, which totals about 60 people.

"While we do not anticipate staff reductions, we do anticipate certain additions to and changes in management," said Gary Simanson, vice chairman of Community Bankers Trust.Robert L. Morrison Jr., Suburban's president and grandson of its founder, could not be reached for comment yesterday. FDIC officials said at the bank headquarters last night that no one from Suburban was available for comment.

Essex does not have a presence in the Baltimore area and executives said they hope to use this purchase to build its business here.

"It's business as usual," Simanson said. "We're intending on keeping all the branches open and intending on expanding in the area," possibly through additional mergers or acquisitions.

The state-chartered Bank of Essex has operated in Virginia since 1926 and has 13 branches under the Bank of Essex, Bank of Goochland, Bank of Powhatan, Bank of Louisa and Bank of Rockbridge brand names. Bank of Essex also runs four branches in the Atlanta, Ga., market.

Community Bankers has been in expansion mode buying TransCommunity Bank of Glen Allen, Va., in the past year. It also purchased the assets of The Community Bank of Loganville, Ga., in November after Georgia regulators seized that bank's four branches.

The company said it is open to other opportunities in the Washington-Northern Virginia area. The company has about $1.35 billion in assets, $1.12 billion in deposits and $800 million in loans.

Federal regulatory officials said that problems at Suburban Federal, which historically had focused on traditional single-family mortgage loans, stem from an aggressive lending program the bank implemented in 2005. The company began requiring less documentation for loans when applicants applied, according to the Office of Thrift Supervision, which seized the bank and appointed the FDIC as receiver. Suburban also began expanding into development and residential acquisition as well as construction and land loans, regulators said.

The Office of Thrift Supervision first noticed signs of problem assets at Suburban in 2006 as well as a series of quarterly losses starting in the third quarter of 2007.

Regulators said they began examining Suburban Federal's loan practices in February 2007. The Office of Thrift Supervision later issued a cease-and-desist order telling the bank to stop writing construction and land loans without regulatory approval. The agency described the bank's practices as "unsafe and unsound" in documents.

Regulators notified Suburban on Nov. 7 that it was considered "critically undercapitalized," which required it to cooperate with the government's efforts to find a buyer or close the bank.

A week later, Dutch insurance company Aegon NV said it was exploring a bid to acquire a thrift as a way to become eligible for the $700 billion federal bailout program and discussed the possibility of buying Suburban Federal. However, it withdrew its application in mid-December, saying it decided not to participate in the bailout program. Aegon has its North American headquarters in Baltimore.

As those efforts to sell the company failed, regulators issued a new order last week that gave Suburban until yesterday to find a buyer or be taken over by federal authorities.

The bank had about $33 million in bad loans as of Sept. 30, about eight times its capital.

Stuart Greenberg, a Baltimore-based banking consultant, said he wasn't surprised that Suburban Federal was unable to find a buyer, "especially when it was a matter of public knowledge that they had a drop-dead deadline."

"It's the kiss of death," he said. "This is a reflection of the quality of the management of the institution and the board of directors."

Bert Ely, a banking consultant in Alexandria, Va., said that he believes the government waited too long to take over the bank, making the deal more costly as more banks are failing.

"That is not the highest percentage I have seen over the last year, but it still is outrageously high," Ely said.

The last Maryland bank to fail was in 1992, when the Second National Federal Savings Bank - then the largest thrift on the Eastern Shore - was closed. Four other Maryland banks also were taken over that year, which marked the tail end of the savings and loan crisis.

The state organization that represents banks said the closing of Suburban shouldn't worry customers about the safety of their money.

"It remains important to emphasize that 96 percent of banks operating in Maryland meet the criteria for being well-capitalized by regulators and have adequate reserves on hand to weather the current stresses to the economy," said Kathleen M. Murphy, president and CEO of the Maryland Bankers Association. "The overall Maryland banking industry is strong and has stood the test of time."

State regulators, who did not have oversight of Suburban Federal, agreed.

"I don't expect this event to affect the safety and soundness of Maryland state chartered banks," said Sarah Bloom Raskin, commissioner of financial regulation for Maryland. "But the FDIC's action illustrates that Maryland is not immune to the economic conditions of our country."

The federal government has seized six banks across the country this year, after closing 25 in 2008. Regulators seized two other banks besides Suburban Federal yesterday.

The Office of Thrift Supervision closed Magnet Bank in Salt Lake City, Utah, after the government was unable to find a buyer for that bank, which has $292.9 million in assets and deposits of $282.8 million. Regulators said they would mail checks to depositors Monday.

Also, Ocala National Bank in Florida was closed by the state's Office of the Comptroller of the Currency. The FDIC entered into an agreement with CenterState Bank of Florida, Winter Haven, Fla., to assume all of Ocala's deposits.